Farmer Fertilizer Focus - Ammonia

By: Josh Linville, Vice President- Fertilizer

Mon, 03 Oct 2022, 23:15

October '22 NH3/Anhydrous Ammonia

Josh Linville

Vice President - Fertilizer

U.S. midwest/Tampa price graph

As mentioned last month, this is something new that we have included into the monthly update. This is the AVERAGE of the entire Midwest which means that your values WILL be different than what the graph reflects. Please do not take this into your retailer and say "why isn't my price the same as here". That is comparing apples to oranges. You might be on the cheaper or more expensive side of this graph. This doesn't take into account logistics/storage/interest/insurance/shrink/etc.

The takeaway from this graph is that in the last month, prices have been jumping which comes as little surprise given European production issues.

For more an international flavor, here is the monthly price graph for Tampa NH3. Again, this should be taken more from a price direction POV than an actual price. Tampa is one of the most visible prices that trend along international movements.

What everyone wants to know first, what do we think will happen going forward

As long as European production remains offline, the world stays in a light recession and the N.A. fall application season plays out near normal, it is very hard to see values falling in the near term.

European natural gas values have been falling in recent days/weeks which is increasing the chance we see nitrogen plants restart, the chances are still very low. That removes around 8% of global NH3 production.

While some politicians have been trying to redefine what a recession is, we are currently in one. If it grows and becomes worse, this could become a danger for NH3 demand from the industrial sector. Again, not a high chance but something t hat needs tracked.

Then there is fall demand. Overall N demand for this fertilizer year is solid but mother nature always gets the last say.

This is all to say that there are still some major global issues that could turn this market on its head but today, prices look supported for at least the short term.

should you buy your fall '22 / spring '23 nh3 needs today?

Fall applicators

Time is running out. November 1 is a mere 4 weeks away. If you haven't locked up your needs, at least be talking to your retailer/supplier about what you are planning on doing.

The price of NH3 has been trending upwards and frankly speaking, it is really hard to come up with a scenario where prices will fall in the next month or two. Not saying it is impossible, it is just really difficult.

Spring applicators

Well, you probably still do not have any options to look at securing your spring needs so this is a bit unnecessary but still worth discussing.

Likely you will not see a price until very close to the end of the calendar year. NH3 producers like to wait and know what fall was or was not before rolling out the spring program. That way they know how little demand is left. How much demand is left. What was or was not produced.

Ultimately, they have a very tight control on the market and there are few options to get around it. We have looked at various hedging ways to develop a program ahead of the producers but have not found a combination that we are confident in.

What has happened in the last 30 days?

Majority of European production remains offline

This situation continues to be my focal point going forward due to its importance on the global markets.

As you can see below, Europe (western and central) is one of the largest NH3 producing regions in the world, accounting for approximately 8.3% of global production or over 19M tons produced per year.

Making a long story short, it becomes very difficult for prices to fall when that much of the world capacity is offline.

Now, all is not lost. We track the Dutch TTF futures market for a sense of where European natural gas values are. Those reached a high of just over $100 MMBtu in recent weeks/months but have since been falling. For a short time, values hovered around $60. Overnight, values tumbled with closing prices in the upper $40's/lower $50's. This has us on much higher alert to watch for any announcement/changes/etc. from European based plants. These facilities know just how hard it is to restart when the plants have been offline for a time. They also know how much harder the process is when temperatures start to fall.

Very likely that a lot of conversation about turning on/staying off are being had at facilities across Europe today.

This will continue to be an ongoing storyline.

Odds of Europe restarted dropped drastically with the Nordstream pipeline sabotage

For some time, Russia had suspended the flow of natural gas to Europe as a method of revenge. Europe was unwilling to allow the Nordstream 2 to come online and supply natural gas to Europe. Then Europe supported Ukraine when Russia invaded. The result is that shipments drastically reduced and European natural gas prices started rising rapidly.

Now that Russia is getting pushed back/losing the war in Ukraine, it seems a scorched earth approach is being used. Last week, it was reported that multiple explosions had caused damage to both Nordstream pipelines with many around the world pointing at Russia as the culprit.

From a strict fertilizer POV, this drastically lowers the chance of seeing European nitrogen plants coming online again. Repairs to pipelines like this are slow and tedious with it being so deep underwater. This isn't like a pipe that you dig a hole to get access to.

As always, it seems the story will get more complicated before it is complete...

North America gears up for fall

It's hard to believe we are this close to fall application. I was always warned that time goes faster the older you get. Like most, I didn't believe it until I saw it.

Regardless, fall application starts in 4 weeks for most of North America with all the questions we always have:

Is the price too high for farmers?
Will mother nature allow for a big/small run?
What does N demand look like for next years crops?
How will logistics play out?

Honestly, there is nothing that stands out as special about this fall. NH3 prices are much higher than normal but then again, so are crop prices. Today, all we can do is sit back and wait to see how it plays out. That is exactly what the NH3 producers are doing. They know that dropping the price today will do little to influence fall demand. They will take the approach of keeping prices steady to higher. Almost like clock work.

Have I mentioned to not shoot the messenger lately?!

Tampa NH3 price rallies again, but still not as much as expected

Unsurprisingly given the current situation for global NH3, the Tampa (great indicator for global markets) October price settled higher than September.

Surprisingly, it was only $25.

As mentioned in previous editions, given the lack of European production and rising demand, we fully expected to see triple digit price moves higher. However, the price from August to September only rose $50 (from $1,100 to $1,15) and now the price from September to October only rose $25 (from $1,150 to $1,175).

There have been reports of spot sales being made in the mid to upper $1,200 range and we fully expected that this would translate to the monthly Tampa price. However, that was not the case.

Do not get me wrong. In no way am I saying this is cheap. It is anything but that. Just curious how much the value has flat lined.

Where are current values in relation to the past

For NH3, we use Midwest Wholesale Average as our base point as it is the easiest spot to track.

Vs 30 days ago - +22% or approximately $230 higher
Vs 90 days ago - +46% or approximately $405 higher
Vs 6 months ago - -14% or approximately $208 lower
Vs 1 year ago - +67% or approximately $512 higher

Bull/Bear Factors

Because no market is ever guaranteed to go higher/lower, we try to consider the factors that can sway values so that we are able to act when they occur rather than react.

Bullish Factors

European production remains offline for winter - nitrogen facilities are hard enough to bring back online after quick turnarounds during the heat of summer. That process gets much more unsteady after being down for weeks/months and attempting during the cold of winter. The chances that Europe remains offline until at least next spring is rising and that is a huge support for global NH3 values.
Solid fall ag application - a lot of farmers who typically apply NH3 in the fall do it due to timing rather than pricing. There are so many things that need done in the spring that if N can be applied in the fall with little to no risk of losing the units, that is one more thing out of the way. Assuming this approach continues and mother nature doesn't kick us in the shins, we could have another blowout fall demand period. That would clear excess inventories and allow producers to keep prices high.
Little new capacity expected - unfortunately, while there are a lot of projects that are being talked about, we are not seeing much in the way of follow thru. It makes sense. Nitrogen production is a costly endeavor. It is a hard market to "break" into. Current producers know that and realize that the players are few.

Bearish Factors

Europe turns on – I would not put this very high on the list in terms of chances of happening...but I do not hesitate to put it at the top of the list that could fundamentally change the global market. If we see Europe turn on again, either by government help or natural gas values falling, then a large chunk of global production returns. That added supply would have to weigh on price ideas.
Recession hits harder than anyone expects - we are already in a recession. I know certain political people are trying to redefine what a recession is but all of my schooling points to we are already there. It just seems like a light recession. Just because it is light now doesn't mean it cannot get worse. Cost of living continues to skyrocket higher. It is more expensive for everything. If we start seeing major cutbacks by people, this recession could grow and take down industrial NH3 demand with it.
High price and/or poor weather equals poor fall demand - if we get thru the fall season and find out that demand was very low, this would mean a higher inventory carryover to winter than expected. Production sites are going to continue to produce at these price levels. Storage is very finite with NH3. Producers could get aggressive on their prices during the winter to clear tonnages. Likely we would see the spring story become "little fall demand means big spring demand so prices should be up" but before spring, fill tons would be lower.

Where are the current nh3/grain ratio values today?

We believe that only looking at the flat price of either grains or fertilizer can be misleading:

Only selling grain can hurt you if fertilizer prices rise substantially
Only buying fertilizer can hurt you if grain prices fall

We look at the ratio "value" to get a better indication of where we are or how many bushels of X does it take to pay for 1 ton of fertilizer.

Would you rather:

Spend 100 bushels to pay for 1 ton of NH3
Spend 200 bushels to pay for 1 ton of NH3

When we compare the current ratio value against recent years, we start to see if we are high or low.

YOUR VALUES WILL LOOK DIFFERENT

This graph looks at the Midwest Wholesale Average price vs the flat grain price. There are no logistics on either product. Your location will look different due to fertilizer logistical costs, grain basis, etc.

Josh Linville’s focal points

I'm changing this going forward simply because I was struggling with what I should put here. Typically, I fill it with general statements that a lot of times you all do not need.

When I look at markets, I try to find the one/couple points that are most important to me that tell the story. That is what I will start doing on this section:

Fall demand (I know, duh) - last fall was the largest agriculture application that we have on record. I cannot stress how difficult it would be to repeat that this coming fall. We could see farmers dragging their feet in hopes of lower pricing in the future. We could see mother nature spoil the fun. Or we could challenge last years pace. How good/bad the fall run is sets the tone for the rest of winter and next spring.
Global recession - NH3 is not just used for agriculture uses. There is a lot of industrial usage as well. We could be looking at a tremendous amount of ag demand (and we are) but if the industrial sector starts to fall apart (never say never, we made that mistake in 2008), it will not matter.
European production rates - western and central Europe account for a little over 8% of the global produced tons of NH3 and most of those plants are offline and appear to be for the foreseeable future. On the flip side, if those plants started to come back either due to natural gas values falling or governments stepping in to subsidize, the market will feel that pressure quickly.

Fertilizers

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